Maxlinear Inc (MXL) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MaxLinear Q3 earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions )

This conference is being recorded today, October 29 of 2012. I would like to turn the conference over to Nick Kormeluk with MaxLinear. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's third-quarter 2012 financial results. Today's call is being hosted by Doctor Kishore Seendripu, CEO, and Adam Spice, CFO.

During the course of this conference call, we will make projections or other statements regarding future conditions or events relating to our products and business. Among other statements concerning future events or projections, we will provide information relating to our current expectations for the fourth quarter 2012 revenue, estimated accruals relating to potential export control violations, our expectations concerning trends in our cable business, and terrestrial revenues, and our efforts to expand our addressable markets, gross profit percentage and operating expenses, potential impact from our pending litigation with Silicon Labs, our current views regarding trends in our markets, including the anticipated impact of new design wins and the size and potential for growth in our markets, and our competitive position in our target markets.

These statements are forward-looking statements within the meaning of federal securities laws, and the actual results may differ materially from results reflected in these forward-looking segments. We are subject to substantial risks and uncertainties that could adversely affect our future results. Our business and future operating results could be adversely affected if our target markets, including the cable market, do not grow, or if we are not successful in expanding our target addressable markets through the introduction of new products. In addition, substantial competition in our industry, potential declines in average selling prices, intellectual property litigation such as pending matters between MaxLinear and Silicon Labs, and cyclicality in the semiconductor industry could adversely affect future operating results.

The potential export control violations present risks of fines, penalties, and other enforcement actions from the Bureau of Industry and Security at the Department of Commerce. A more detailed discussion of these risk factors and other factors you should consider in evaluating MaxLinear and its prospects is included under the caption Risk Factors in our filings with the Securities and Exchange Commission, in particular, our most recently filed 10-K and first and second quarter 10-Q and our upcoming 10-Q for the third quarter of 2012. These forward-looking statements are made as of today, and MaxLinear does not currently intend and has no obligation to update or revise any forward-looking statements. The third-quarter 2012 earnings release is available on the Company's website at www.maxlinear.com.

In addition, MaxLinear reports gross profit income, or loss from operations, and net income, or loss, and basic and diluted net income, or loss per share, in accordance with GAAP, and additionally, on a non- GAAP basis. Our non-GAAP presentations exclude the effect of stock-based compensation expense and its related tax effect, expenses of investigation and estimated fines and penalties related to export compliance matters, accruals under our equity settled, performance-based bonus plan, and expenses related to our current patent litigation matter with Silicon Laboratories.

Management believes that this non-GAAP information is useful because it can enhance the understanding of the Company's ongoing economic performance, and MaxLinear therefore uses non-GAAP reporting internally to evaluate and manage the Company's operations. MaxLinear has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how the Company internally analyzes operating results. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued under -- issued earlier today. The earnings release and reconciliation is available on our website, and we ask that you review them in conjunction with this call. Now, let me turn the call over to Kishore Seendripu, CEO of MaxLinear.

Thank you, Nick, and good afternoon, everyone. Thank you all for joining us today. Before diving into the financial highlights, I would like to note that in the third quarter of 2012, consistent with our prior guidance, we delivered record revenue on the strength of our product cycle-driven momentum in cable. In addition, we experienced significant revenue growth in our legacy and new terrestrial products. These two factors, in combination with our significantly improved gross margin, generated strong operating cash flow generation in the quarter. Additionally, as announced in the quarter, we repurchased approximately 1.65 million common shares from our venture capital investors for $9.2 million, significantly addressing the venture capital share overhang dynamics.

Despite the challenging macro market dynamics for consumer terrestrial markets and our cable customers stated intention to lean down inventories as we approach the end of the year, we are both securing and are on a strong pace to garner a significant number of design wins in both cable and terrestrial TV. We are ever-confident in our strengthening competitive position and accelerating design win momentum in the terrestrial market, which are driven by our industry-leading, latest-generation Super Radio hybrid TV tuner and tuner demodulator solutions.

Our continued technology leadership relative to the competition in cable is advanced even further by our industry-leading, fourth-generation broadband RF/Mixed signal full spectrum capture technology. Recently, major cable OEMs have announced next-generation products for cable data and video gateways that incorporate our latest full-spectrum, Capture Cable receiver products namely MxL265 and MxL267. We are excited about the alignment of our disciplined R&D investment and our steady progress towards TAM expansion initiatives beyond cable and terrestrial markets.

Last week, we announced the MaxLinear 400 family of satellite receivers, which represent the industry's first single-chip, full-spectrum capture satellite front-end devices. Even more momentously, it marks MaxLinear's entry into the world's largest pay-per-view and free-to-air television market, namely satellite TV. Each of these devices, manufactured in 40-nanometer digital CMOS process can receive up to 4.8 gigahertz of satellite spectrum from one to four multiple RF inputs from the satellite dish antennae and simultaneously output four, six, or eight satellite channels located anywhere in the satellite broadcast spectrum. The MaxLinear 400 devices target next-generation satellite gateways and set-top boxes that support multi-screen viewing through [IPB's] in-home content delivery, personal video recorder functionality, emerging catch-up television features, and cross-channel change capability. In each of these satellite receivers, all active front-end components are fully integrated which significantly reduces the cost of end applications. Even more impressive is their unprecedented low participation of 1.7 watts which is several times lower than alternative implementation and is one of the key decision factors for satellite OEMs.

Moving to the financial specifics. Net revenue in the third quarter was a record high for MaxLinear at $27.8 million dollars, up 14% over the second quarter of 2012, up 58% percent over the year-ago quarter and about the midpoint of our guidance. GAAP and non-GAAP gross profits in the third quarter were 63% of revenue, well above our prior guidance of 61%. GAAP net income in the third quarter was $0.5 million, or $0.01 per diluted share, and non-GAAP net income for the third quarter was $4.3 million, or $0.13 per diluted share. I will now discuss current trends in our business.

Cable continued to be a growth driver for the Company in the third quarter with cable revenues growing approximate 10% relative to the second quarter of 2012. In the third quarter of 2012, cable represented 64% of our total revenue. We continue to be significant beneficiaries of the ongoing deployment of DOCSIS 3.0 voice and data gateways by large MSOs. Relative to the quarter two of 2012, our revenue grew approximately 15%.

Our cable video solutions also grew relative to the second quarter of 2012. However, strong growth in video server gateway applications was offset by weakness in basic cable set-top box and [HDDTA] applications. We continued to have strong customer designer win momentum in strategic cable front-end technology platforms. In particular, ARRIS selected our 16-channel and 24-channel full-spectrum Capture Cable receivers for the broad range of their next-generation DOCSIS 3.0 products.

Moving to the terrestrial markets. Revenues from terrestrial applications increased by approximately 20% quarter-on-quarter beneficially reversing a trend of sequential revenue decline seen in earlier quarters. However, strong growth in hybrid TV and terrestrial set-top boxes was offset by declines in automotive and other terrestrial applications. We are garnering strong customer design win momentum in hybrid TV and terrestrial set-top boxes with our MaxLinear 600 family of Super Radio tuner solutions and our MxL683 tuner demodulator SOC which supports the ISDB-T digital television standard prevalent in South America and Japan. These include Panasonic for DVB-T2 standard set-top boxes deployed in Europe using our MaxLinear 603 tuner, Vestel Electronic, Europe's leading TV manufacturer, who is now shipping in high volume, hybrid LCD and LED televisions for Europe, based on our latest hybrid TV tuner IC, MxL601.

And finally, our ongoing strategic collaboration with SES Astra for developing SAT-IP gateways using our MaxLinear 400 full-spectrum Capture satellite receivers. Satellite IP gateways are next-generation systems that convert satellite-delivered video programs into Internet protocol accessible content and allow subscribers to watch the satellite content on IP-connected devices such as smartphones, tablets, PCs, and smart TVs with different programs available on multiple devices simultaneously.

In conclusion, we are excited about the fact that our third quarter represents our fourth consecutive quarter of record revenues. The quarter was also characterized by relatively balanced growth for both cable and terrestrial applications. These revenues, together with significantly improved gross margins, contributed to a very strong and record quarterly operating cash flow. With that, now let me turn the call over to Mr. Adam Spice, our Chief Financial Officer, for a review of the financials and our forward guidance.

Thank you, Kishore. I will first review our results and then briefly discuss our outlook. In summary, Q2 revenue was a record $27.8 million, above the midpoint of our guidance of $27 million to $28 million. This represents quarter-on-quarter growth of 14% and 58% year-over-year. As Kishore noted, net revenue for the third quarter was driven by double-digit sequential growth in cable and relatively strong growth in terrestrial. We also experienced design win momentum across a wide range of our product areas.

Now, moving to the income statement. GAAP and non-GAAP gross profit for the third quarter were both approximately 63% of revenue, above our prior guidance of 61%. This compares to 62% in the second quarter of 2012, and 64% in the year-ago quarter. This increased sequential gross margin was due to a combination of favorable mix changes as well as COGS improvements, driven by our supply chain team.

Our Q3 GAAP operating expenses were $17 million, which includes $2.6 million of stock-based compensation, $1.2 million from an accrual related to our performance-based equity bonus plan for 2012, and $100,000 in net professional fees and potential penalties attributable to the export compliance matter and Silicon Labs' patent litigation. As we have discussed previously, any payouts under our 2012 performance bonus plan will be settled in shares of MaxLinear stock. Net of these items, operating expenses was $13.2 million, which is $100,000 lower than the prior quarter and $800,000 lower than our prior guidance of $14 million. Q3 GAAP operating expenses include $10.9 million of R&D expenses, which in turn, included stock-based compensation of $1.7 million and $700,000 related to the 2012 bonus plan. The favorability in R&D spending relative to guidance was driven in part by an increasing amount of new hires being located in lower cost locations and certain project-driven engineering expenses such as prototyping being pushed into the fourth quarter.

Third quarter GAAP OpEx included $6.2 million of SG&A, which includes $900,000 in stock-based compensation and $500,000 in bonus plan accruals, in addition to $700,000 in legal fees attributable to our ongoing export compliance matter and patent litigation with Silicon Laboratories. Net professional fees benefited from a $600,000 accrual reversal relating to potential fines and penalties arising from potential violations of export controls and sanctions laws.

At the end of the quarter, we received a written cautionary notice from the Office of Foreign Assets Control at the Treasury Department. The notice indicated that OFAC would not take further action against MaxLinear with respect to the matters identified in our voluntary disclosures provided that we continue to comply with export control laws. As a result of this information, we reversed all accruals for fines and penalties totaling $600,000 related to the potential OFAC violations. Please note that our voluntary disclosure filings with the Bureau of Industry and Security are still pending, and we will maintain a continuing accrual of $300,000 related to the potential BIS violations. At the end of the third quarter 2012, our headcount was 264 as compared to 250 at the end of the second quarter.

GAAP income from operations was $400,000 in Q3, compared to a loss of $2.5 million in the prior quarter and GAAP loss from operations of $3.2 million in Q3 of last year. GAAP net income per share in the third quarter was $0.01 on a fully diluted shares outstanding of 34.5 million. GAAP net income per share includes $2.6 million in stock-based compensation expense, $1.2 million for an accrual related to our 2012 performance-based bonus plan, and $100,000 in net professional fees and penalties attributable to the export compliance matter and Silicon Labs patent litigation. Net of these items, our non-GAAP earnings per share was $0.13.

Moving to the balance sheet and cash flow statement. Our cash, cash equivalents, and investments balance was approximately $80 million at the end of the third quarter 2012 compared to $84.3 million in the prior quarter and $85.7 million at the end of 2011. Our cash generated in operations in the third quarter 2012 was $6.3 million, approximately $5.3 million better than in the second quarter of 2012 and approximately $9 million better than in the year-ago quarter. As you recall, we used $9.2 million of our cash to buy back stock totaling 1.5 million shares from our VC investors the third quarter.

Accounts receivable totaled $16.3 million at the end of the third quarter compared to $15 million in the prior quarter. The days sales outstanding for third quarter was approximately 52 days, or three days higher than in the previous quarter and nine days higher than the 43 days at the end of the year-ago quarter. The year-on-year increase in DSOs is primarily a function of customer mix. As we move to more direct sales for cable customers, less favorable payment terms, and some slow paying by certain of our customers contract manufacturers in Asia has affected our DSOs unfavorably. However, we are comfortable with the quality of our accounts receivables aging, having experienced very limited bad debt expense. As a reminder, we only recognize revenue on a sell-through basis, and as such, we are not subject to revenue fluctuations caused by changes in distributor inventory levels.

Our in-house inventory at the end of the quarter was $8.9 million, up approximately $400,000 compared to the $8.5 million in the previous quarter and up approximately $800,000 versus $8.1 million at the end of 2011. Our inventory turns declined to 4.7 in the third quarter, compared to 4.9 turns in the second quarter. We continue to elect to build inventory of new product to support upside opportunities, primarily in cable and hybrid TV. This inventory build has resulted in inventory turns being lower than our target of approximately six times.

That leads me to our guidance. We expect revenue in the fourth quarter of 2012 to decrease 7% to 10% sequentially to $25 million to $26 million. Built into this range, we expect cable revenues to decline on a quarter-on-quarter basis approximately 8% to 10% with weakness expected in DOCSIS 3.0 data and voice modems. Sequential growth across all of our cable video applications offset the decline in data applications on both an absolute and percentage total of revenue basis.

In our terrestrial products, we anticipate a general flatness as growth in TV is almost entirely offset by declines in terrestrial set-top. Recent feedback from our larger customers in cable, data, and voice modems indicate that they are looking to draw down their inventory of modems as they exit the year. As such, bookings have lagged entering the quarter in this area relative to where they had been in the prior two quarters. That said, as of late, we have seen some turns orders and pull-ins from the contract manufacturers for certain voice and data modem customers indicating that inventories may have already leaned out materially. We are encouraged by the increasing activity in the TV business for our new hybrid TV solutions which is more of a turns business and is difficult to predict accurately.

We expect GAAP and non-GAAP gross profit percentage to be approximately 61% in the fourth quarter. Our gross profit percentage forecast could vary somewhat depending upon mix and other factors, in particular the relative contribution from terrestrial applications.

We continue to fund strategic development programs targeted at delivering top line growth in 2012 and beyond with a focus on increasing operating leverage in the business. As such, we anticipate incremental tape out expense -- tape out-related expenses and measured to net headcount additions in the fourth quarter. We expect Q4 2012 GAAP operating expenses to increase relative to prior quarter at $20 million, reflecting higher net expenses from the Silicon Labs patent litigation. Again, we benefited from the net export compliance accrual reversal in the third quarter. Other increases include anticipated payroll increases related to the full-quarter effects of our Q3 hires, modest headcount additions in the fourth order, and a step-up related to a 40-nanometer R&D tape out, NRE, and peak CAD tools usage in the quarter. We expect that Q4 2012, non-GAAP operating expenses will increase to $15 million. Again, due to the full-quarter effects of the Q3 hires and modest additional hiring in the quarter, a step-up related to a 40-nanometer R&D tape out, NRE, and peak CAD tools usage.

In summary, we are pleased to report strong sequential revenue growth, gross margins, and OpEx management that delivered strong operating leverage and positive cash flow. With that, I would now like to open the call to questions. Operator?

(Operator Instructions)

Our first question comes from the line of Tore Svanberg from Stifel Nicholas. Please go ahead.

Yes, thank you. Congratulations on the results. A few questions. First of all, on cable, you mentioned you had started to see some flattening out of inventory so just hoping you could elaborate a little bit on that? And, especially talking about voice and data -- and video?

Hi Tore, this is Kishore. Basically, at this point in the quarter if you compare it to the last two quarters, we were more significantly booked going into the quarter than we are today. Having said that, as Adam mentioned -- it is correct. We feel that maybe there is some turnaround happening right now because we are starting to see pull-ins and the new orders from contract manufacturers of some of the major OEMs who are our main customers. So, we don't see any significant impact of any environmental changes in terms of the actual pull of cable data modems from many of our customers. However, there is a determined intent on some of these customers to lean out the inventories as they end the year so we are seeing the effect of that.

There is also a secondary factor, [between] a main factor yet, but that could be motivating some leaning out of inventories that is primarily due to the fact that we have now launched our full-spectrum cable receiver that supports, in conjunction with the Intel Puma 6 platform -- it supports an incredibly high speed 1-gigabit-per-second data rates for cable data modems. We also know that some of the major OEMs have announced a number of gateway products in their analysts' calls last week where they have showcased these products, and they are in very high, optimistic expectation of these products starting shipping some time in the first half of next year. That could also be motivating some of the reasons why they are leaning their inventories down. However, we feel that that transition cannot happen fast enough even though we would be good beneficiaries of this transition. So, we feel that these orders are beginning to trickle back, and with regards to pull-ins, where we are just taking a very cautionary stance on the subject right now.

Tore, there is one other thing -- I'll provide a little more context. This is Adam. In the prior two quarters, we have indicated that we've gone into the quarters booked about 82% to the midpoint of the range, and so I would say, we are not talking about a stark contrast to prior quarters. We went into this quarter about 77% booked to the midpoint of our current range for Q4.

Very good. The follow-up on cable, when should we expect some full band Capture revenue? And Kishore, as that transition happens, would you expect your share to be higher than in your current cable business?

I want to be careful about talking about share in our current -- of our current -- I just want to ask the question back to you again. You meant, our share of cable revenues in our revenues? Or, you are talking of our share of the cable revenues in the data device market?

Well, there just seems to be a product transition that's coming towards your full band Capture solution, and you said that should be a positive transition for you. I'm just trying to understand from a share perspective, what is going to happen there?

I think that with regards to our own revenues, we are now seeing, as we have talked in the call -- terrestrial revenues now picking up some nice growth so terrestrial interrupting what has been declining for a few quarters in a row is now picking up some revenue growth -- a nice steady growth -- because of hybrid televisions. We're picking up some momentum there. The revenues growing and should get stronger as we get into the next year. So, proportionally when terrestrial is growing, we expect cable to also grow in a balanced way. However, the transitions -- if they were to happen meaningfully, we don't think it will happen the first half of next year. However, in the second quarter timeframe, there could be some small shipments that start, and we should start seeing the positive effect of that in terms of revenues and such and also for technology node change to 40-nanometer which is what our full-spectrum Capture chip is in. But talking about share changes -- today in the marketplace, we are the only offering that supports 24 channels worth of data reception capability using a full-spectrum chip. There's not a competitor, nor a -- with regards to front-end -- nor the platform with which we work most collaboratively, namely the Intel Puma 6 platform, who can support this level of channels and the benefits of the data rates of about 1-gigabit per second. So, we hope that this translates into actually even more market share gain, but on our own end, we are not counting on that. We are assuming a modest, even split between our platform, which is the Intel platform, and the non-Intel platform.

Very good. And on satellite, it sounds like there's a lot of design activity going on there. I think you've always positioned that as a 2014 revenue driver. But, just given all the design activity, could you start to see some revenues there already next year?

The satellite design cycle is much longer than even the cable cycle, so I would leave it in 2014 as a revenue growth. But, I want to add one thing though is that Adam in his expenses talked about for the guidance for the fourth quarter about a 40-nanometer mask that will hit the books. We actually are seeing -- we already have received that mask. You can see the satellite receiver announced. So, it's pretty exciting for us because it's the world's first full-spectrum Capture reception for satellite, and there's nothing like it out there available in the marketplace. And, it's going to be a while before any competition gets up to that level of performance and feature set that we are supporting today.

Very good. Just last question for Adam. Adam, could you give us maybe specifically how much the Silicon Labs legal -- or Silicon Labs-associated legal expense is going to be in the quarter? Should we model that to stay at this run rate going forward?

These things are very hard to predict, as you can imagine. It depends on the different actions that are taken and how they are responded to. I would say that when we went into -- when we provided our guidance for Q3, we estimated the total expenses for export compliance and Silicon Labs litigation would be about $0.5 million in the quarter. And, it came in a little bit heavier than that as far as what contributed to Q3. I think that for Q4, we are looking at that probably closer to $1 million in the quarter. That's kind of what we're looking at right now.

Very good. Thank you. Great quarter.

Our next question comes from Anil Doradla from William Blair. Please go ahead.

Great job in the quarter. A couple of questions. Kishore, you talked about what -- 77% versus around 80% booked. But, when I look at the guidance, is it fair to say that you're baking in a certain amount of conservativeness? Are you baking in a certain amount of cancellations or push-outs? Because to me, I don't know -- it appears based on the product cycle that you're in -- it's not material difference.

Anil, I think it was Adam who guided on the booking year, and he is correct. But, he said 70% of the current guidance.

77%

77% of the current guidance range, which is 25% to 26%. Because we wish to be booked about 80% in the previous quarters, and accordingly the guidance was set. So, in this particular case, we took our current bookings and extrapolated what the guidance should be. That's another way to think about the problem. So, I don't think there's anything that we see that is going to be based on this guidance that is going to adversely affect this any further. There could always be surprises. We have a range to sort of cover that. However, either upside possible, we always put that in the range as well. And if those inventories in the cable side do lean out and they start ordering more, we are in a very good position to supply the product and book the revenue. I would say that right now, we would stick to our guidance.

Neil, I think I'd provide a little more color. This is Adam. I think that we have done a pretty good job in the last several quarters in being pretty accurate to our revenue guidance. I think we were equally comfortable this quarter where we're at. I think that as we talked about more of the mix in Q4 moving to terrestrial and terrestrial being more of a turns-oriented business, it is more difficult to predict. It's a little bit harder to go out there with a little more aggressive forecast just because you don't have the bookings visibility. Could things happen? Yes. It could be -- to provide some upside. But, we're very comfortable right now, particularly thinking where the contribution from cable's going to be, and cable typically does give you much better visibility. So, I think all that factors in to where we are. Also, I think the other thing to note is as much as we are a product cycle-driven Company, some of what we might be seeing is more macro-oriented because we are seeing many of our semi-peers, as you know, coming in with similar guidance as far as decreases from the Q4 levels. So, I think part of it is macro, part of it is very much the cable folks wanting to bring down their inventories and that factoring into our guidance. But also, there could be some macro factors at play here, particularly as it relates to our consumer business.

Good. And, the other question I had was, if we just look at some of the inventory issues going around, do you think that this is just a one-quarter event? By Q1, we are going to work through it? Or, do you think -- how much visibility do you have on this inventory build-up cycle?

As we said a little bit earlier, that we are already starting to see some indications that maybe the inventory is a little leaner than maybe even our end customers realize within the supply chain. So, right now, we don't see anything that would indicate this is a prolonged thing that's going to take multiple quarters to work its way through. We are hopeful that Q4 is it. As we've talked about in prior quarters -- I think almost every quarter since I've joined the Company -- that we've tried to make people aware that the cable business is subject to lumpiness. I think it's a notoriously lumpy business, and we've had -- we've really not suffered any effects from that. The lumpiness has all been on the upside for us actually over the last six quarters or so as cable has grown very strongly. This is the first quarter where we have started to witness that lumpy dynamic that we've always talked about but hasn't manifest itself. I think you're just seeing some of that lumpiness right now.

And finally, Broadcom is now coming out with their own eight-channel solution. How do you look at the competitive dynamics?

So, Broadcom is coming out with their own eight-channel solution, and we have had ours for a long time in the marketplace, right? We've already announced our full-spectrum Capture with 24 channels. That's far more sophisticated, far more advanced. Obviously, we will be -- our OEMs and our partners are driving along with us -- driving towards the transitioning happening to the gigabit per second faster so that we continue to maintain an aggressive lead on that offering. Having said that, we look at ourselves as the preferred front end for the Intel-based platform, and there are dependencies on a lot of the things beyond our control. So, I think that, all in all, we feel very strongly positioned with the right offering, with the lead on our competition, to be able to continue to be successful in this market.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Quinn Bolton from Needham & Company.

Wanted to follow up on Anil's question about the cable modem market. As you start to look into next year, hopefully we work through the inventory in the current eight-by-four modems. But, with the 16- and 24-channel count modems being announced by some your customers, what is the risk that you see the eight-by-fours continue to decline in the first half? And, anticipation of the ramp of that 16 and 24s later in the year? It may not be quote, an inventory correction. But, is there risk that you see the eight-by-fours wind down ahead of the ramp of the higher channel count, faster modems?

Hi, Quinn. We don't see that risk, primarily because the market -- these are pretty higher-end platforms -- these data and voice modems with the full-spectrum Capture, 24-channel base, 1-gigabit per second. The market -- it's a little tier -- and you will have modems that are eight-by-four-based, and you will have modems that are higher end. So, we see predominantly next year still playing out to be an eight-by-four market, but the second half of the year -- maybe latter half of second half year -- the 16-by-4 or 16-by-8 or 24-by-8 picking up. So, there is no such concern about eight-by-fours winding down. In fact, if anything, we would like that to happen earlier, but I don't think that's going happen. So, next year, the dynamics could be pretty tame. We would not worry of some very hectic changes to the system.

Okay. The second question, just on the data side of the market. Can you give us some sense if there is normal seasonality in the March quarter. Understand that the cable revenue is being impacted by customers drawing down inventory in the December quarter. But, if you sort of remove the effect of that inventory correction, what would normal seasonality in that business be December versus March? I guess what I'm trying to get at is with -- assuming that the inventories are one-quarter correction, could you see that business recover in March? I know you not giving specific guidance. Just trying to think about some of the seasonal patterns in that business.

The thing that drives the buying cycles, buying from MSOs in the cable space, is primarily their capital allocation, right? Every year, they go through their budgetary cycles, and during that process, they will do the normal vendor negotiations for pricing and such. So, that cycle usually happens -- starts happening at the end of the year, and it's the early part of the year. So, is it seasonality? I do not think so, but however there is seasonality now in terms of how the budgets are allocated -- when budgets are developed. To that extent, I believe the first quarter is about the -- where you will start seeing a pickup start later in the first quarter, or maybe in the early part of the quarter itself.

Okay. And, moving to the video side of cable, it sounds like that business was a little bit weaker, especially on the DTA site in the third quarter, but it looks like video comes back a little bit in the December quarter? Is that just, again, somewhat reflecting the lumpiness of the cable market? Or, are there other specific factors going on on the video side of the business?

Quinn, one thing I want to really emphasize in this call is that there are no material competitive dynamics that are affecting our cable forecast. It's just the -- one quarter we will have the video server gateway up, and the other quarter, you will have the DTA up. It seems that there is no real discernible pattern other than an ordering cycle and how the OEMs supply their product to the MSOs. So, we do not see any competitive dynamics at play in this particular situation as well, even though it's the video markets.

Okay. And then, lastly, I know you had indicated that the actions taken by Silicon Labs to create confusion with your hybrid TV's customers may have resulted in some sockets going to other competitors, not necessarily SLAB. But, it sounds like the hybrid TV is actually ramping pretty nicely for you right now. Do you think you -- is this reflecting some of those designs perhaps going away, and you are still able to grow that business? Or, is the effect of the Silicon Labs activity more of a later 2013 effect?

Actually, firstly, the Silicon Labs activities related to the IP actions that both the parties have taken have indeed slowed down our momentum in capture of hybrid TV what was to be meant for the 2013 revenues. So, had this event not occurred -- I hate to acknowledge this, but we would have probably been rising up to be one of the top owners of the hybrid TV market. So, much as we deride these techniques by the competitors, they have been successful in somewhat discouraging some of our customers from moving forward the solutions. All the growth you're seeing in hybrid TVs [indeed] 2013 sockets because what starts shipping in the fourth quarter is actually for 2013. But, I think they're being very successful in the hybrid TV in terms of what sockets we are winning. However, I regret to say that they did -- sockets that we had won where we did not get any business was purely a result of Silicon Labs' activities. We hope to rectify that with the course of action that we are pursuing right now.

Okay. Thank you.

Our next question comes from the line of Ross Seymore from Deutsche Bank. Please go ahead.

This is Bob for Ross. I guess today is the last day I can use a baseball metaphor. I was just curious, in the hybrid TV market, it shows some great growth. How early are we in this ramp? Is it something that's going to take a pause for the next couple of quarters? Or, was the third quarter really an encouraging sign, and we are still in early days of the ramp?

I think the third quarter is still early signs, but I think, based on what we have on the backlog, we feel that the ramp -- on '13 sockets, the ramp hasn't really started. End of Q1 is really, I would say -- I could strongly tell you that we are now in for a very strong growth. So, having said that, we foresee hybrid TV getting stronger and stronger. I think I can safely tell you that right now, so you should not see any interruption in this ramp for hybrid TV.

Great. Maybe a question for Adam. I know the seasonality of the revenues are always tough. But, curious about your OpEx? You talked about a 40-nanometer tape out in 4Q. Does that -- does the pro forma OpEx then decline a little bit in 1Q? Or, is there some kind of merit increases in 1Q, taxes? Just curious if you can give some color on how that smoothes out?

Without giving specific guidance beyond the current quarter, I would expect that we will see some step-back from the OpEx that we are anticipating for Q4 in Q1 because we won't have that 40-nanometer R&D expense. So, if you look at that, a 40-nanometer mask set -- all in, say, $1 million. It's a pretty healthy step-up. We won't see the effects of a merit increases hit us until Q2 of next year, given where our cycles run. So, I think that we will see a reduction in spending in Q1 of next year, but there are some things -- there are some factors into that -- they are a little bit far off for now. I don't expect another sequential increase. We've been pretty good this year in giving our guidance -- saying, look, we are going to be between -- call it, $13.5 million and $15 million at the high end. We didn't hit the $15 million non-GAAP spending until this current Q4 guidance, so I think we've been pretty good staying within that envelope in exercising some OpEx control and discipline. I don't see that changing as we move forward into 2013, and again, I think so much of the volatility -- or step-ups -- are really driven by these R&D tape outs. And again, we are not planning a 40-nanometer R&D tape out in Q1 at this point.

Great. Thank you.

At this time, I'm showing no further questions in the queue. I'd like to turn the conference back over to management for closing comments.

Thank you, Operator. As a reminder, we will be participating in the Stifel Nicholas Midwest One-on-One Conference in Chicago on November 8, and we hope to see many of you there. Thank you for joining us today. We look forward to reporting on our progress to you in the next quarter. Thank you very much.

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation, and at this time, you may now disconnect.